Utilities: Boring, But Consistent

The slow-and-steady XLU is definitely worth backing

The past year has been a roller-coaster ride for investors. After peaking last April, stocks experienced a mild decline from May to mid-June of 2011. After a bounce-back, the wheels fell off from late July through the beginning of August. From August through October the S&P moved sideways. A sharp rally in October was followed by a 10% pullback in the first part of November. From Thanksgiving through the end of March, it was straight up for stocks as the S&P gained 22.5% during this run.

Click to Enlarge During this ride, few sectors have been as consistent as utilities. In fact, since the bottom in March 2009, you would be hard-pressed to find a more consistent performer than the Utilities Select Sector SPDR (NYSE:XLU). The chart of XLU shows how the exchange-traded fund has been in a very tight, upward-sloped trend channel.

The range on the channel is approximately $4, and these prices reflect the dividends paid by the ETF. The XLU presently yields just below 4% from its dividends. This attractive yield certainly has played a role in the consistent performance over the past year and the past three years.

The XLU caught my eye this week because six of the top 10 holdings in the fund report earnings this week. One company, FirstEnergy (NYSE:FE), reported earlier today and beat EPS estimates by 2 cents. Given the importance of these earnings reports on the XLU, I decided to put together a table with the sentiment readings toward the six stocks.

I was surprised to see how bearish and indifferent analysts were toward the sector. Of the six stocks reporting this week, FE is the only one with more buy ratings than hold ratings, and even then it is 10-to-9. In all, these six stocks have 29 buy ratings and 74 hold ratings. Considering how consistent the sector has been, this is hard to believe.

Duke Energy (NYSE:DUK) is one of the least-liked by analysts with only one buy rating and 17 hold ratings. DUK also is a favorite of short sellers with a short interest ratio of 6.5. Consolidated Edison (NYSE:ED) is the only stock with any “sell” ratings, and it also is the only one without any “buy” ratings. ED also has a relatively high short interest ratio at 4.8.

While I like the idea of investing in the XLU more so than choosing one particular stock to invest in, the sentiment indicators for DUK and ED make them attractive. Both stocks have a slightly better dividend yield than the XLU, but there is safety in numbers with the XLU. Duke’s yield is 4.7% and Con Ed’s is 4.1%. The yield on the XLU is 3.96%. If DUK and ED surprise analysts and the stocks rise, the XLU will benefit as well. If DUK and ED both disappoint, the XLU likely will decline as well, but probably not as much as the individual stocks would.

I like the outlook for DUK and ED, but I think the safe play is to buy the XLU.

As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.